Mortgage lenders targeted members of Congress whose districts included large numbers of subprime borrowers to win approval of legislation to allow them to expand mortgage credit to low-income and low-credit-quality households, according to a new study from the National Bureau of Economic Research.

“While the view that mortgage lenders are completely at fault through lobbying behavior may be popular in the current environment, our findings suggest a more nuanced reality: pressure on the U.S. government to expand subprime credit came from both mortgage lenders and subprime borrowers,” economists Atif Mian, Amir Sufi and Francesco Trebbi wrote.“It is difficult to find a ‘smoking gun’ which shows with certainty the determinants of government policy.”

The authors found “a sharp increase in the statistical strength of constituent interests in predicting votes on subprime lending related legislation.” In other words, members of Congress were more likely to vote for bills broadening lending if the fraction of subprime borrowers in a given representative’s congressional district increased.

The increase in expanded mortgage credit from 2002 to 2006 “corresponded to a period in which special interests, as measured by campaign contributions from mortgage lenders, and constituent interests, as measured by the fraction of subprime borrowers in a congressional district, appear to be influencing politician voting behavior,” according to economists Mian, Sufi and Trebbi. Trebbi is an assistant professor of economics at the Booth School of Business Sufi, an associate professor of economics at the Booth School and Mian, an associate professor of Finance and Real Estate, Haas School of Business at the University of California at Berkeley.

“Campaign contributions and lobbying expenditure by mortgage lenders increased sharply during this period, and campaign contributions from mortgage lenders increasingly targeted representatives from high subprime share congressional districts,” the trio wrote.

Their findings are intriguing, but not surprising, Trebbi acknowledged.

“I believe it is actually a standard approach for lobbying firms to scout for potential champions based on district's characteristics," said Trebbi,. “The correlation between fraction of voters in a specific constituent group and campaign contributions from that group is, however, nonlinear. Wal-Mart (WMT) does not need to give money to politicians from Arkansas to be heard or to influence them" because it's such a large employer.

The results, though, may not always be positive.

“Government intervention, at initiation, is often well intentioned and justified by economic theory,” the authors wrote, “however, once the government is involved in the financial sector, individuals within the economy have strong incentives to tailor government policy toward their own objectives. When government officials respond to constituent and special interests by manipulating policy, the resulting effects for the financial sector are potentially disastrous.”

Trebbi, Sufi, and Mian are even-handed in their criticism of Congress noting “government support for mortgage lending to subprime borrowers took many forms, with support from both Republican and Democratic fronts” including the “affordable housing mandate imposed by the Department of Housing and Urban Development [HUD] on Freddie Mac and Fannie Mae.”

Both Republican and Democratic fingerprints, they said, are also on “prominent bills debated and passed in the U.S. Congress that reduced regulation of subprime lenders and increased mortgage support for low-income households. Some of these bills display prominent bipartisan support, stemming from both social policy on the left and an 'ownership society’ [a phrase used often by President George W. Bush] discourse on the right.”

During Bush’s eight years in office, the homeownership rate rose to a record 69.2% in 2004 from 67.5% when he took office in 2001.

The authors reviewed the pattern of campaign contributions toward representatives from districts with a high fraction of subprime borrowers and found from 1994 to 2000, mortgage industry campaign contributions toward these representatives are relative steady.

“However, beginning in the 107th Congress (2001-2002), there is a sharp relative rise in mortgage industry campaign contributions toward representatives from high subprime share districts,” they said. Congressional representatives from districts with a higher percentage of constituents who would qualify as subprime borrowers saw as much as “an 80 percentage point increase in the growth of mortgage campaign contributions from 2002 to 2006. In contrast, we see no effect for non-mortgage financial industry campaign contributions.”

The authors said their task was made more difficult because of the various federal agencies involved with overseeing housing finance and regulation and because “it is difficult to isolate a single bill or single action to estimate the effect of constituent and special interests on government policy.”

The volume of legislation allowed the researchers to examine legislation which was approved and defeated and they were able to uncover “evidence that highlights the important role of both constituent and special interests in housing and housing finance public policy during the subprime mortgage credit expansion from 2002 to 2007.”

Taken together, they concluded, “the results suggest that constituent interests, measured with the fraction of subprime borrowers in a given Congressional district before the subprime mortgage expansion, and special interests, measured with campaign contributions from the mortgage industry, both helped to shape government policies that encouraged the rapid growth of subprime mortgage credit.”

The economists posed what they described as an obvious: question: “What precise votes are being bought with the money?” 

They deflected the answer.

“One difficulty in answering this question is the large number of bills that are related to subprime lending and the housing market: from the 103rd Congress (1993-1994) to the 110th Congress (2007-2008), over 700 roll calls in the House alone were related to 'affordable housing,' 'homeownership,' or 'subprime.' according to the Congressional Research Service,” they noted.

Instead, they took an alternative approach by examining voting patterns on each single roll call.  By combining all roll call votes for any legislation related to subprime lending, affordable housing or homeownership, they found “the predictive power of mortgage campaign contributions on a representative’s voting behavior increases sharply during the subprime mortgage credit expansion.”

The fraction of votes for which mortgage campaign contributions have an effect on voting patterns rose from 3% in the 104th Congress (1995-1996) to 20% in the 108th Congress (2003-2004), the authors said.

At the same time, the number of subprime borrowers – and their influence –grew.

In the 105th Congress (1997-1998), the fraction of subprime borrowers in a representative’s district significantly predicts the representative’s votes on only 30% of roll calls; by the 108th Congress (2003-2004), it increases to 70%, according to the research.

“Taken together, these findings suggest that politicians responded to both special and constituent interests when supporting policies related to the expansion of subprime lending,” they wrote.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.

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